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IndiGo, The Dominant Domestic Airline, Eyes More International Routes

InterGlobe Aviation Ltd., the operator of IndiGo, is eyeing a larger share of international air routes with huge cash reserves and a large aircraft order book as one of the world’s fastest-growing aviation markets shows signs of saturation.

Domestic air passenger traffic growth fell to its lowest in more than four and half years in January, according to data from Directorate General for Civil Aviation. In comparison, the number of fliers on international routes grew at a faster pace for the second time in the last three months.

Foreign carriers handle nearly 61 percent of the air traffic flying from and to India, while the rest is controlled by Indian operators.IndiGo, the country’s largest carrier with a 42 percent market share on domestic routes, accounts for only 6 percent market share in the international segment.

Given the low market share on global routes, the growth opportunity is huge, said Ronojoy Dutta, the airline’s chief executive officer, at an investor conference call. IndiGo, according to him, aims to grow its international business aggressively and a lot of its future capacity will go towards such routes.

Destination South East Asia?

The Gurugram-based company plans to use narrow-body aircraft for international flights, keeping the flying time restricted to six hours. Santosh Hiredesai, an aviation analyst with SBICAP Securities, said, “Unlike other Indian airlines, IndiGo is planning to expand into South East Asian nations and Turkey which are still not explored by Indian airlines.”

Narrow-body or single-aisle aircraft operated by IndiGo have a low-cost structure. This has helped the carrier corner 42 percent of the domestic market in 10 years, allowing it to offer cheaper fares.

To perform an encore in the international sector, IndiGo will depend on its cash reserves of Rs 14,000 crore (nearly $2 billion) and a large order book of 400 aircraft. Some of these planes will be used to replace its existing fleet of 208. The high cash balance would act as a buffer against volatility in crude oil prices till the new routes develop while the large order will provide a steady stream of planes, Hiredesai said.

How IndiGo’s Cash Hoard Grew

IndiGo’s cash balance grew from Rs 950 crore to Rs 14,000 crore in 10 years when its peers’ reserves depleted. That can be due attributed to:

Its low-cost structure resulting in high profitability.

Its strategy of ordering hundreds of aircraft in advance and selling them closer to delivery date, logging a profit on each sale.

The planes would then be leased back immediately for six years and replaced by newer ones to avoid major maintenance costs.

But aggressively entering a new market comes both with advantages and risks. Competition could be the biggest risk, according to Mark Martin, chief executive officer of aviation consultancy Martin Consulting. Still, flying overseas will give IndiGo competitive advantage, he said, as fuel prices are on average 10-15 percent cheaper, earnings are in foreign currencies and yields are far better.